Transformation has become one of the most over-used and loosely used words in the business world globally. Everyone’s talking about it and everyone’s claiming to be doing it.

Virtually every large company that I know has a “digital transformation” program. They’re all totally committed to “transformation.”

But, when I look under the covers, what do I find? With few exceptions, those “digital transformation” programs are focused on deploying digital technology across the company to do what the company has always done, just faster and cheaper. It is the latest manifestation of the scalable efficiency mindset that has driven all our institutions over at least the past century. The goal is to get more efficient, by whatever means necessary.

But, is that really transformation? Here we get into semantics and, of course, the word can mean whatever you want it to mean. Let me just say that, for me, transformation is something much more fundamental. The metaphor I like to use is the caterpillar transforming into a butterfly. The caterpillar isn’t just slimming down and crawling faster. The caterpillar is now a completely different entity, not just in terms of appearance, but in terms of actions, needs and capabilities. Looking at the two side by side, you would never imagine that the two were in any way related, much less the same. That’s transformation.

So, if we move from caterpillars to companies, what does transformation mean? It means going back to the most basic questions of all and using them to redefine your identity – to become a butterfly. Those questions include:

What market are we in?

What business are we in?

How do we compete?

What are our metrics for success?

If the answers to those questions are not fundamentally different from what they were yesterday, you may be evolving, but you’re not transforming.

Does this matter? Yes, because we’re living in an exponential world where change is accelerating. If we remain the same, or settle for incremental change, we’re likely to be increasingly marginalized and ultimately meet an unfortunate demise. The imperative for transformation is made clear by the significant and sustained erosion in return on assets for all public companies in the US and the compression of corporate life spans on the S&P 500.

So, if transformation is an imperative and incremental change is a death sentence, how do we embark on that transformation journey?

Rethink strategy

We can begin by rethinking strategy. We need to move beyond the five year plan and instead focus on two very different time horizons – 10-20 years and 6-12 months. This is the zoom out, zoom in approach to strategy that I’ve written about elsewhere.

The 10-20 year horizon forces us out of our comfort zone and challenges us to provide very different answers to the questions I framed earlier. If you truly understand the exponential forces that are re-shaping our global economy, you could not possibly believe you will be in the same market or operating the same kind of business 10-20 years from now. Your most basic assumptions about the business will be challenged.

The 6-12 month horizon forces us to commit to near-term action that will begin to drive the transformation process. It helps us to focus in a more challenging world where the temptation is to spread ourselves too thinly as we seek to sense and respond to everything that is going on.

Reframe innovation

There’s another approach that can help us on our transformation journey. That involves reframing innovation. Today, when executives focus on innovation, they quickly narrow their focus to product or service innovation. Some manage to even address process innovation or business model innovation. But that’s where they stop.

They fail to recognize that there’s a deeper level of innovation that needs to be addressed – something that I call “institutional innovation” and explored in this report.Institutional innovation goes to the most basic question of all, which is why do we have large organizations? The traditional answer has been scalable efficiency – it’s far easier and lower cost to coordinate activity across a large number of people if they’re all in one institution, than when they’re spread out across many institutions. There’s reason to believe that reason is becoming much less compelling.

If that reason is less compelling, is there another rationale that will drive the success of large institutions in the future? I believe there is – it’s scalable learning. The reason we will come together in large institutions in the future is the opportunity to learn faster than we ever could if we stayed on our own or as part of a smaller institution.

That’s a fundamentally different institutional rationale and conflicts deeply with the rationale of scalable efficiency. If we take scalable learning seriously, it will force us to re-think and innovate across all dimensions of our institutions – how we organize, how we mobilize, how we measure success and how we connect with others outside our institution. It's ultimately the most powerful form of innovation because it will unleash the potential for far more innovation at the product, process and business model levels.

Scale the edge

Recognizing the need for institutional innovation will then increase our commitment to transformation. Everything will need to change in our institutions. That caterpillar will need to become a butterfly.

But how? The traditional approach to transformation – what I call the “top down, big bang” approach to transformation - has a very high failure rate. The failure rate is driven by the strength of the immune system and the antibodies that reside in every large institution and that are very effective at mobilizing at the first sign of an effort to change the way things are done. Never, ever underestimate the power of the immune system.

Rather than trying to confront the immune system with a massive spending program that will endure for years in an effort to transform the core of the institution, my advice is to drive transformation by scaling an edge of the institution. An edge is a part of the institution that today has limited revenue or impact but, if you understand the exponential forces that are shaping the broader economy and society, has the potential to scale very rapidly to the point where it becomes the new core of the institution – it is not just a diversification effort or a growth effort, it is an effort to replace the existing core with a new, transformed core.

Resist the temptation to take that edge and try to push it back into the existing core to serve as a catalyst for transformation there. The immune system and antibodies are very effective at recognizing that foreign body and mobilizing to crush it quickly. Instead, focus on scaling the edge as rapidly as possible and, over time, pull more and more of the people and resources from the core out to the edge. That edge can serve as the cocoon for the birth of a beautiful butterfly that can fly to places that the caterpillar would never have imagined, much less attempted to reach.

The bottom line

Transformation is an imperative in a world of exponential change. But the “transformations” that we are currently attempting are unlikely to get us from where we are today to where we need to be.

We need to take inspiration from the caterpillar that somehow finds a way to transform into a butterfly.

One problem with the caterpillar/butterfly metaphor is it suggests we need to embark on a journey from one fixed object to another fixed object. The real win in an exponential world is to find out how to transform into something that will keep transforming as the pace of change further accelerates. That’s the power of the scalable learning institutional model – it provides us with the tools and approaches to embark on a continual transformation journey.

I wrote about the trust paradox about 8 years ago. The paradox is that we all say that trust is increasingly important, yet trust is rapidly eroding in all institutions worldwide. How could that be? If trust is so important, why are we not building institutions and adopting practices that can amplify trust, rather than erode it?

In my previous blog post, I tried to explain why we’ve been unable to resolve this paradox. At a high level, my explanation suggested that the very practices that helped us to build trust in the past are now contributing to the erosion of trust. The harder we work at building trust, the more rapidly it erodes. I went into a lot more detail in that blog post on why this is the case.

In the intervening years, trust has continued to erode in all our institutions globally. What surprises me is that, while this erosion is widely reported, few people seem to be focused on understanding why this is happening, much less addressing the issue. Of course, there’s a tendency to focus on slices. Liberals and socialists tend to put all the blame on corporations and greedy capitalists. Free market advocates tend to blame the government. What everyone seems to ignore is that this is a much broader issue, extending across all institutions around the world. Effectively resolving this paradox will require re-examining the foundation of all our institutions, not just a segment.

In the years since I wrote my original post, I’ve continued to reflect on what is fueling this paradox and what will be required to resolve the paradox. I stand by the perspective that I offered in the original post but, as always, there are more dimensions to be explored.

Fear and trust

In my earlier post, I didn’t highlight the psychological dimension that is contributing to the erosion of trust. As I’ve discussed elsewhere, we are in the earliest stages of a Big Shift in our global economy that produces mounting performance pressure on all of us, as individuals and institutions. As humans, we have a natural psychological tendency when confronted with fear to magnify our perception of risk and discount our perception of reward, we therefore tend to shrink our time horizons, just focusing on the present and, as a result, we tend to fall into a zero sum view of the world (it’s a win/lose proposition) and trust erodes because at the end of the day we know only one of us is going to win and the rest will lose. At an emotional level, fear begins to prevail.So, part of the erosion of trust is that we, as individuals, are becoming less trusting. But that’s not all.

The trap of scalable efficiency

As I’ve written elsewhere, all our institutions today have been built on a model of scalable efficiency. The key is to tightly specify all tasks, highly standardize them and tightly integrate them. It’s very much a command and control model – the best way to be efficient is to tightly control everything. It prompts institutional leaders to look inward because that’s where the efficiency gains are greatest. Since the key to efficiency is tight control, everything outside the firm is viewed with suspicion and fear – it’s far better to bring everything inside so that it can be tightly controlled.

In the scalable efficiency institutional model, asking questions is a sign of weakness. You don’t know the answer? Go back and read the manual.

All these tendencies are reinforced in an environment of mounting performance pressure. We need to squeeze harder and become more self-sufficient if we’re going to survive. We also need to get bigger as institutions so that we can squeeze everyone outside our institution harder as we gain more scale and bargaining power. We can’t trust anyone that we can’t control, so is it any surprise that those outside our institutions lose trust in us?

The big shift from scalable efficiency to scalable learning

If we’re going to extricate ourselves from this spiral of eroding trust, we need to undertake what I call “institutional innovation”, reassessing at a fundamental level the core rationale for our institutions. We need to challenge the prevailing rationale – scalable efficiency – and replace it with an alternative rationale – scalable learning. In a world of accelerating change and increasing volatility, if we’re not learning faster, we’ll be increasingly marginalized.

To be clear, when I talk about learning here, I’m not talking about training programs or reading books. That’s about transmitting existing knowledge. In a more rapidly changing world, the most powerful form of learning is creation of new knowledge. If we’re serious about creating new knowledge, it increases the importance of learning through action since we need the feedback loops to help us gain even more insight and ideas. It also increases the importance of learning with others since, no matter how smart any one of us is, we’ll learn a lot more if we come together with others from different backgrounds and perspectives in a shared quest to achieve growing impact. Most importantly, scalable learning requires us to reach out beyond our institution and to find ways to build deep-trust based relationships with others who have relevant expertise and knowledge so that we can learn with them.

A commitment to scalable learning helps to build trust because it inherently requires us to acknowledge that we don’t know everything and that we want to address questions, problems and opportunities for which we don’t yet have answers. In other words, we have to express vulnerability and, as I suggested in my earlier post, that's a key to building trust.

The role of narratives in building trust

That leads me to the topic of narratives, something that I have written extensively about, starting here. For those who haven’t followed me on this journey, I make a distinction between stories and narratives, even though most people treat these two words as synonyms. For me a story is self-contained – it has a beginning, middle and an end. Also, stories are about me the story teller or some other people – they are not about you in the audience.

In contrast, for me, narratives are open-ended, there is no resolution – yet. There’s some kind of significant opportunity or threat out in the future and it’s not clear whether it will be effectively addressed. The resolution of the narrative hinges on you, the listener. It is a call to action since your choices and your actions will help to resolve this narrative.

So, what’s the role of narratives in building trust? As I’ve suggested elsewhere, narratives express vulnerability. They’re a call to action because the individual/institution framing the narrative is at least implicitly acknowledging that they can’t address the threat or opportunity on their own. They need help and they’re asking for help.

And, by the way, opportunity based narratives are far more effective at building trust because they suggest that everyone can benefit from the opportunity. Threat based narratives play to the fears that many of us already have and tend to make trust more challenging – if my life or well-being is at stake, can I really afford to trust those who might be part of the threat? Opportunity based narratives, on the other hand, can be very effective in overcoming the fear that more and more of us feel as we experience mounting performance pressure. Yes, there are challenges ahead, but there's an opportunity that can significantly improve our condition.

At the institutional level, narratives also shift the focus from inside to outside. By (my) definition, an institutional narrative is a call to action to those outside the institution. It defines an opportunity that's inspiring and motivating for those outside the institution and calls them to come together to help achieve the opportunity. If framed in the right way, it also builds trust in the sense that the institution is not just focused on its own needs, but on the needs of others and is committed to investing time and effort to help others to achieve some meaningful opportunity.

Opportunity based narratives are also a powerful way to unleash scalable learning. These narratives define an opportunity at a high level, but tangible enough to be credible and inspiring. They leave a lot of room for learning what that opportunity truly requires and, most importantly, for learning about the actions required to ultimately achieve that opportunity. By focusing on a meaningful opportunity and inviting others to join together, narratives provide motivation to learn faster, together. As people find that they are learning faster, together, they develop a deeper trust in each other, as well as in the institution that framed the narrative that brought them together.

The bottom line

Institutional narratives can be a promising way to build and sustain trust with people outside the organization. They can also be a powerful catalyst in helping to shift institutions to a scalable learning mindset and model. But they cannot do this on their own. Avoid the temptation to pick up the phone and call your PR agency to craft a narrative for your institution. To be credible, narratives must be lived every day by the people in the institution. Words don’t persuade people to trust; actions do.

Opportunity based narratives will require institutions to embark on a transformation journey in order to be credible. Unfortunately there’s a very powerful immune system and antibodies ready to mobilize to crush any attempts to transform an organization. Never, ever under-estimate the power of that immune system. It is a key reason why all institutions have remained wedded to the scalable efficiency model for so long, even as evidence mounts that that model is less and less effective. To succeed in the transformation journey, institutions will need to find ways to scale the edge, rather than trying to transform the core. The good news is that a powerful narrative can be very helpful in scaling the edge much more rapidly and with far less resources than might have been required even a few decades ago.